The rise of business process utilities

“Converging Trends in Outsourcing: Moving Toward the Light,” a Gartner report written by Allie Young, has a lofty title but raises a very down-to-earth concern about where outsourcing will eventually lead us. We are witnessing the convergence of a number of business/IT trends, the outcome of which is still unknown.

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The big trend in outsourcing is, of course, BPO (business process outsourcing). Companies are saying they don’t want to continue to own and maintain processes and technologies that are not core to their businesses. However, BPO is still about customized business processes. A company turns over its assets, people, processes, technology, and facilities to the service provider and says, “You run it.”

In the past, outsourcers used offshore facilities to reduce their own costs, but this has changed. Now it’s the customers who are demanding lower costs. So after the outsourcer has wrung out all of the excess overhead, the next move is to go completely offshore to further reduce customer costs.

That’s fine for two or three years, but in short order all of the cost reduction will be wrung out of offshoring as well. The next step will be BPU (business process utility) computing.

For the BPU model to work, the process or business unit owner -- say, the vice president of HR -- has to accept the fact that HR processes are not a competitive differentiator for the company. BPU is all about standardized processes and a one-to-many architecture. So whereas BPO for the most part uses a company’s existing architecture, BPU does not. Lisa Stone, vice president at Gartner, says there is typically less than 15 percent customization in a utility model, unless the company is willing to pay for it.

BPO will grow around types of services, not around competitive differentiators, with the caveat that a company must be willing to accept “good enough,” according to Gartner’s “Converging Trends in Outsourcing.”

The twist, the study says, is that by 2007 more than 60 percent of BPO decisions will be made at the business-unit level without the involvement of IT. By 2008, the study says, more than 30 percent of new software purchases will be delivered via the utility model, with more than 70 percent of utility offerings targeted toward business units or line managers, rather than toward IT organizations.

If BPU services are no longer purchased by the CIO, who has knowledge of the enterprise’s overall IT architecture, but are purchased instead by individual process managers -- who have profits and losses to worry about and who may say, “I just want to get the job done at the lowest cost” -- those companies are heading down a dangerous road.

For example, Linda Cohen, vice president of the strategic sourcing group at Gartner, tells me about one Gartner customer whose vice president of HR bought into an HR BPU solution. “It was no problem until it came time to tap into the new tax regulations and it didn’t operate with their SAP infrastructure,” Cohen says.

The trend toward outsourcing noncore processes is a given. But it must be kept in mind that these decisions “affect the IT landscape deeply,” Young notes in her Gartner study. Although the business process owners may want to take the lead in sourcing service providers, the final decision should be made by the entire executive team.